401(k)
An employer-sponsored defined contribution retirement plan that allows employees to contribute pre-tax income, reducing current taxable income and deferring taxes until withdrawal.
Understanding 401(k)
In 2024, employees can contribute up to $23,000 ($30,500 for age 50+) to a 401(k). Many employers offer matching contributions. While the tax deduction is valuable during working years, all 401(k) distributions are taxed as ordinary income in retirement, subject to RMDs at age 73, and have no death benefit. The combination of RMDs and taxation can create unexpected tax burdens in retirement.
Why This Matters for Retirement: Understanding 401(k) is essential for making informed decisions about tax-free retirement income strategies. Whether you are evaluating an IUL policy, planning Roth conversions, or comparing retirement vehicles, this concept directly affects your outcomes.